But what about depositors?

Nick Rowe has stirred up a real hornet’s nest with his last two posts, here and here. He’s basically saying that banks’ lending decisions are affected by reserves, rather than just by capital, as what the Chartalists (or MMT or PK, as they also seem to be known by) have been saying.

Economists from all directions of the monetary and economic profession have weighed in. There have been arguments in the comments, either saying that banks are reserve-constrained, and then either saying that all the reserves the Fed has recently created will be lent out soon, sparking inflation, or are being constrained by the Fed’s interest on reserves. Then there were arguments that banks are not reserve-constrained (and that they do not matter at all,) and are instead capital-constrained. There has been mention about Canada’s banking system having been zero reserve for some time now.

There have been arguments saying that additional reserves create loans, or that additional deposits create loans. There have been arguments that banks lend only when there are creditworthy clients, but there are also those who say banks have to lend when deposit levels rise, and there are those who say that banks have to decide to both raise loans and deposits simultaneously. There have even been assertions that small banks care more about reserves while big banks care more about deposits when deciding to lend out. There has been confusion as to excess reserves is vs. excess desired reserves. There was some discussion of reserves as merely a bank settlement mechanism, and also what might happen if banks ever settle without base money. And there have been discussions on how a bank’s making more loans actually increases money supply, i.e., if there is a multiplier.

Those 2 posts of Nick have been a veritable 'clash of the titans', and the most creative economic bloggers in banking and monetary theory seem to have chimed in. Interesting ideas, all, so I put forth a question to all, thinking there should be something in current thinking that addresses it:

But what about the depositors? I have yet to hear ideas on what happens to depositors when the banks are awash with reserves. Do they still continue keeping their money with the banks, knowing that it nets them no differently from putting their money under the mattress? What of their other alternatives? What if it's causing them to pour more money instead in objects with 'perceived' scarcity? Could this lead to an actual reduction in the multiplier?

Ok, I added the multiplier statement because it was after all a post about multipliers. At this point, I’m not sure anymore that loans and deposits could have a directly observable multiplier effect. But since depositors seemed, to me, a crucial component of the concept being discussed, why was all the discussion merely centered on how the flooding of reserves may or may not affect bank lending? How was it affecting bank deposits? Depositors are, after all, you and I, and people we know.

I’m still waiting for someone to take up my query, and it has now been buried underneath further discussions on whether banks indeed lend reserves. I can only surmise that while everybody remains engrossed on why banks haven’t been lending out all those new reserves that the central bank has pushed onto their balance sheets, we would soon be shocked by the final outcome of what Roubini has warned us as being the mother of all carry trades. Flooding commercial banks with reserves without regard to its effect on depositors' rates is a boon for Wall Street investment firms looking to capitalize on the resulting depositor disenchantment. Even if they get only those disenchanted enough at the margin, that could still be enough to explain for the return of risk among investment funds. So in the meantime, Wall Street hustlers will probably make hay while the sun is out. I have the perfect pitch for them:

"Give me your funds, your surplus,
Your crowded out deposits yearning for yield,
The wretched refuse of the banks swimming in reserves.
Send these, the yieldless, liquidity-tossed to me,
I lift my investment rates beside the golden carry trade!"

Update:
Tom Hickey makes a valid point in comments: Reserves are of no concern to depositors. Reserves are solely for interbank settlement and do not have any direct impact on the depositors until they write checks on their deposit accounts. Then there is never a worry because the Fed always provides the reserves necessary for the system to settle transactions among commercial banks. Where's the problem?

Reserves affect borrowers in the commercial banking system because the Fed sets the FFR and the discount rate on borrowed reserves in the interbank overnight market that influences spreads by affecting the banks' cost of making a loan. Depositors with funds in excess of FCID limits need to be concerned about bank solvency (capital), not liquidity (reserves).

So I clarify my thoughts: You could say that since most commercial banks now have excess reserves, this is lowering the price for them to source funds for settlement, so they do not have to pay as much to attract depositors as a stable source of funding. Although thinking about it more, it may not really be the flooding of reserves in the commercial banks that may have caused the lower rates per se, if they are, as winterspeak/JKH said in Nick’s post, just the after-effects of Fed buying out bank toxic assets. But could it be more correct to say that the low FFR (rather than reserves) is causing the deposit rates to be low?

Nonetheless, what I’m pointing out here is the after-effect: that depositors at the margin who are dissatisfied with their current rates putting money in the bank may be easily convinced to put more money in funds/shadow banks that are 1) outside the scope of normal regulation, 2) are usually invested in securities that are higher risk, and 3) generally introduce inter-connectedness risk into the system, if these shadow banks invest/hedge with/lend to one another.